Being the beneficiary of life insurance on your ex-spouse is a form of financial comfort and security because generally support, such as alimony or child support, will end in the event the ex dies.
To get or protect this security blanket, spouses can enter into binding and enforceable agreements regarding life insurance in a divorce. Spouses often negotiate agreements whereby one or both spouses have life insurance on his or her soon-to-be-ex in a divorce. This is especially common when that spouse receives support or relies on the other to provide care or financial support to children.
An agreement may require one spouse to maintain an existing life insurance policy or obtain a new policy on his or her life for the benefit of the other. Or, it may require one spouse to make himself or herself and his or her medical history available for the other spouse to purchase life insurance on his or her life.
What should I consider when negotiating life insurance?
There are many considerations in negotiating agreements where one or both spouses will have life insurance on his or her soon-to-be-ex in a divorce. Here are some questions in negotiating a life insurance provision, which you should consider including in your agreement:
- Are there existing policies on the life of the spouse you want insured? If so, are they through employment or privately held? If the spouse only has insurance through employment, that insurance will likely end in the event that spouse changes jobs. If there is an existing policy that is privately held: What kind of policy is it? What is its term? Can ownership be transferred? What is the death benefit? Is there a cash surrender value? What are the monthly premiums?
- Is the spouse on whose life you want insurance on uninsurable, or insurable at a reasonable cost? Even if one spouse wants insurance on their spouse’s life, you first have to determine if the spouse on which you want insurance is insurable and if that insurance affordable.
- What type of life insurance policy to you want? There are many types of life insurance policies.
- How long will the life insurance policy be in effect? If you are the beneficiary of the life insurance, for how long do you want that security? If you are the spouse whose life is insured, for how long do you want it to be insured for the benefit of your ex-spouse? Is the cost for a longer-term policy affordable?
- How much can or will the death benefit be? If you are the beneficiary of the life insurance, how much do you want the death benefit to be? If you are the spouse whose life is insured, do you want to cap how much that life insurance is for? Should the amount of the death benefit change overtime?
- Who can be designated as beneficiary or contingent beneficiary?
- Who will pay the premiums? While instinctively, many beneficiaries of life insurance want the insured to pay the premiums, paying the premiums ensures that they are timely and fully paid, thus giving you more security.
- Who will own policy? The owner of the policy generally has control to make changes to the policy, such as to sell or encumber the policy, or change the beneficiary. What restrictions do you want on the owner?
- How will there be accountability? What checks and balances will be in place to make sure that everyone is acting in compliance with the life insurance provisions in an agreement? If the spouse whose life is insured is the owner of the policy, how will the other spouse confirm that the premiums are timely and fully paid, the policy is maintained, and that the beneficiary has not been changed? If the spouse is the beneficiary on the policy on his or her spouse’s life owns the policy, how will the spouse whose life is insured be sure that they know the amount of the insurance, who the owner is, and who the beneficiaries are?
For more information on life insurance and how the courts may handle it in a divorce, check out my article, “What A Court Can Do With Life Insurance Upon Divorce?”
For more information, contact Erin at 301-347-1261 or [email protected].